Hello and welcome to the Pearson Third Quarter 2018 Trading Update Analyst Call. Throughout this all participants will be in a listen-only mode, and after that there is a question-and-answer session, and just to remind you, this is being recorded. So today, I'm pleased to present John Fallon, CEO; and Coram Williams, CFO. Please begin.

Thank you and good morning everybody. Thanks for joining us for our nine months trading update. John Fallon here and as you've heard with me is, Coram Williams, our Chief Financial Officer. Headline for today is that we've had another key selling season behind us, we are in good shape. We are performing in line with our expectations and we are on track to report on underlying profit growth for the full year. Underlying sales are level of flat with the last year with two stories to tell. The first is that we are picking up the pace across all our structural growth businesses. So Online Program Management, Virtual Schools, Pearson Test of English, Pearson Vue all growing strongly all doing well. Alongside that, we are running our U.S. Higher Education Courseware business on the basis that the market remains challenging, and it does. We are performing well competitively. We are making good progress on our digital transformation and that really sets us well for the future. As you know as parts of our technology transformation, we went live with our new ERP, our Enterprise Resource Planning system in our largest business in the U.S. in late May. These big technology implementations are always complex, and we did have some initial supply chain challenges as a result, but we've worked very hard to minimize the impact on our customers, ensuring that students have the tools where they need for the start of term. And as we begin the new system, we are making sure that we are in much better shape for back-to-school in January and we are very confident that we are. To put this in context, it does mean that we have now replaced successfully decades old technology with a new proven platform that reduces risks, accelerates our digital transformation, and is fundamental to us achieving the efficiency gains that we have committed to. And it's running the business more efficiently that enables us to return Pearson to underlying profit growth this year and to invest more organically in future digital growth, all sustained by an increasingly strong balance sheet. So, let's have Coram to take you through the details of current trading and then I'll just say a little more about the progress on our strategic priorities. So, Coram, over to you.

Thanks John, good morning everybody. Let's start by taking a look at our sales performance by region. In North America, revenues were flat in the first nine months of 2018 in underlying terms. We saw good growth in a number of areas. Firstly, OPM due to higher enrollments. Secondly, Connections, which is benefiting from a good pipeline of new Virtual Schools. And thirdly, Professional Certification, where we continue to benefit from the recent launch of a contract to administer medical college admissions tests. This was offset by expected declines in Higher Education Courseware, the ongoing retirement of learning studio and in U.S. K-12 Courseware. In U.S. Higher Education Courseware, revenue declined 3% in line with our guidance and the expected phasing of sales with the benefits of lower returns is proportionally smaller in the larger second half of our selling season. We saw lower than anticipated gross sales partially offset by growth in digital sales and better than expected returns. As John mentioned, we experienced some challenges with the implementation of our new ERP system in the U.S. during the quarter. This led to delays in the delivery of some physical product which we partly compensated for by extending free temporary digital access. We made good progress in fixing these issues and whilst we do believe there was a small impact on gross sales in the quarter, we should largely recover this during in Q4. Our market share remains within the 40% to 41.5% range that we’ve discussed previously and adjusting for the extension of digital access, our digital sales growth was up mid-single-digits for the nine months. In Core, revenues increased 2% in underlying terms due to strong growth in Pearson Test of English, OPM services in Australia and the UK, and Professional Certification partly offset by declines in…

Thanks Coram. Coram has just given you a quick update on the third of three specific priorities that you can see on this slide becoming simply the more efficient, so let me just give you a very, very brief update on the other two. The digital transformation of our courseware and assessment businesses is progressing well in U.S. Higher Education for example, our focus on affordable choice and better outcomes means that our digital and subscription models now make up the majority of our sales in this part of Pearson. And this shift will continue as more customers see the benefits of our Inclusive Access and eBook rental models, as we triple the [indiscernible] [0:09:28.2] size of our print rental program and as we bring that next generation of more personalized digital product to deliver better outcomes for students to market. I'm really thrilled to say that we are now in testing of our new developmental math products and it looks great, and we will have it in the hands of our customers in the spring as you remember that's the first product to launch our new global learning platform. And on the second of all three strategic priorities across all four of our structural growth opportunities, we're doing very well year-to-date and more importantly, we have really good strong pipelines and great events in going into Q4 and through into next year and beyond. So I'm particularly pleased for example with the progress we are now making in online program management and we are very excited about the opportunity that we see over the next few years. So all in all, that means we remained firmly on track to meet our full year expectations and deliver underlying profit growth. We are performing well competitively. We are investing to ensure we emerge as the winner in digital learning. We are helping our customers to develop the skills that learners need to improve their employability prospects and prosper in an ever-changing world, and we are doing all based on the basis of strong foundations, and increasingly efficient company strong cash generation and prudent management of our balance sheet. So, we have a lot still to do, but we continue to make steady progress in building a stronger and more sustainable business. And with that, Coram and I will be very happy to take your questions. So, back to you, Hugh.

[Operator Instructions] Our first question is over the line of Sami Kassab of Exane. Please go ahead, Sami. Your line is now open.

Three questions to start please. The first one, can you give us a bit more color on the future prospects of Virtual Schools? And I’m struggling with the following idea. You disclose that Pennsylvania and Louisiana had been two states that you've renewed the contract for, and official statistics show that you have 9,000 students enrolled there, which is more than 10% of total enrollment. And yet you are reporting good revenue growth and the tone and the outlook remains quite good. So can you help me understand whether the enrollment pressure may come next year or whether they are other factors that are affecting that enrollment pressure and which are those factors, please? Secondly, can you comment on your cost inflation outlook? I think you were talking about 1% to 2% cost inflation in North America. Now in the context of wage inflation picking up and in the context of you moving towards more digital talent, are you still confident in cost inflation remaining below 2% mid-term? And lastly, on the Growth division, I think, John, you were expecting the Growth division to return to growth, last year. Perhaps you by then had the South Africa order already in the books. So where is the division actually underperforming expectation in the emerging market?

Okay, Sami. I’ll pick up the first of those and ask Coram to pick up on the other two. I think the important thing to think in Virtual Schools is not all enrollments are of equal economic value and what you’ve got rolling off enrollments this year, our customers who have been essentially taking more and more services in-house progressively. So, the revenue per enrollments of Pearson from low has been declining and what we are bringing on is new partners where we’ve got a much fuller partnership and they are sort of looking to Pearson to provide a much fuller range of services. So there is a higher revenue per enrollment. So that’s why even though enrollments will be down from this year, it will actually healthy revenue growth in the business. And actually in Baltimore for 2 days and we kept the next with the new management team there, who’ve done a fantastic job of taking off from the team who was there before who have been with the business from start-up mode and have taking it to a certain size and scale, but we now that needed to sort of rejuvenate and fresh to take it on to the next stage. They’re doing a fantastic job of building much closer on strategic relationships with our virtual school boards and partners, which I think names you’ll see retention rates improve over the next few years. We’ve got a really good job of embedding efficacy in this part of because as you know, this is an area where it's really important that we’re able to prove to unless you make this and parents that their children attending this school. The virtual schools are going to achieve more than they would in bricks and mortar or other virtual schools. And you’re seeing from our efficacy reports earlier this year that we are exactly able to make that point. And the sort of net promoter schools and all the other measures that you have, we’re really performing very well. So there is a transition as we sort of see some of the older legacy partnership come off again enrollment role and these new partnerships come on. But actually, I’m much more excited and much more confident in the future of this [indiscernible] [0:15:42.2] because that generates the next stage of the business and we're doing a well [indiscernible] [0:15:51.6] really shows, it's a big growth opportunity for us. Coram, do you want to pick up on the other two.

Sure, good morning, Sami. On cost inflation, I think we've been very clear in the past that this runs at about £50 million per year in our cost base. It's really -- and that's driven by our salaries and very, very significant chunk of cost base is our labor bill, it's about half of it. And we manage salary inflation in the 2% to 2.5% range, and we effectively use our scale in buying supply chain and other services to mean that we don’t really have any inflationary cost pressures in the rest of the cost base. And I think you’re right to identify the current environment is probably putting a bit of upward pressure on the salary bill, but the key thing to remember is our headcount is reducing and has done fairly significantly already and will continue to do so, as we deliver the £300 million cost savings. So I think the £50 million of inflation is a good guide, even if there is a little bit of upward pressure on the actual inflation rates. On the Growth segment, so you're right, there was -- as we flagged a number of times, there is a significant order that came through in one of the big South African stakes in our K-12 courseware business in early 2017 that meant that the comparative has been tough all the way through the year and we been very explicit on that. If you exclude that fact as I mentioned, the greatest segments actually up 1% on an underlying basis. So it's going in the right direction on the trajectory is good. And the thing to remember is that in a more normal year like one that we’re seeing in '18, the South African school courseware business is quite heavily weighted towards the fourth quarter. There are a lot of sales that normally go through that. So you should see that growth number improve by the end of the year.

And I would just add to that, I mean as well as being confident, we will see growth return by the full year. Again feeling good about the prospects of this part of the Company over the next few years, as Coram and I spent some time last week with the leaders of our businesses in China, Brazil, South Africa, India, and we've got some fantastic exciting growth plans that are started to come through and built very much on real sort of synergies and scale with different parts of the Company, so again feeling very strong about that for next two years.

We have Barclays' Nick. Please go ahead. Your line is now open.

I've got three questions. So first maybe just picking up on Sami's points about cost inflation there, I mean Coram said, as part of his answer that the headcount is reducing. And there is no risk of double counting here because isn’t that fully captured in the savings number you’re guiding to, so if we’re thinking about this in terms of the step chart that you had showed us, savings are one block in that chart and then you have cost inflations separately. So, thinking on that basis could cost inflation blowing enough start to be more than 50 million. And second question, just on the ordering issues and the timing there, can you explain a bit more why that’s going to unwind in Q4. I guess thinking about it simply if people didn't get the books in September then they didn’t sell them. So why do you get some back in Q4 and in gross sales? And then third question, you mentioned the developmental math product is going to have a pilot next year, that’s kind of the first vanguard of your new products I guess. Is it fair to say, it's pretty unlikely the faculty will mandate our product in '19 having just seen a pilot in the spring, want to take several reiterations and therefore possibly several years of showing into faculty to actually persuade them in the scale to change to that product?

Coram, do you want to pick on the first two and then I'll pick on the third one, sure.

Yes, Nick, on your first point on cost inflation. I get where you are going but I don’t think it's quite right. The savings related to the headcount of what comes out of the cost base, so we take those out at the time. And then the points that I'm making is that because headcount is lower going forward, your cost base is lower and therefore the inflationary effect is lower. So I don’t believe we are double counting those. There are actually two separate effects. One is what happens to cost base when you turn the heads down. And the second is what the ongoing effect that what put pressure on the salary bill might be. So I do believe we are protected to an extent against that upward effect. And on the ordering issues, let's just spend a moment explaining what happened because I think that will then help to outline why we think those sales will come back. So, there were really two effects. The first was early on in the selling season, an interface between a legacy order management platform that some of our customers use to place their orders and our ERP system didn’t work properly. We fixed it. It was a couple of weeks to do so but that meant when the orders inflate through, they came later than we would normally have received them. And then on supply chain and this is the second effect which we operate in a just-in-time basis to be little while to catch up. So at the end of September, you have two effects in the numbers. One, a slightly higher backlog of physical orders which we are yet to be delivered; and two, to help students deal with that until they got the books. We had extended temporary digital access for a couple of weeks. Now the reason that both of those unwind in October is, the books subsequently get delivered. They still need them because they only have temporary access on the digital side or one or two chapters in PDF form. So they still require the book to complete of course. We make that sell. And then secondly, we convert the temporary digital access into a paid registration and again that happens in October. And we are seeing both of those effects in our numbers. Now, the key thing here though is that all of this is pretty modest in financial terms. So, it doesn’t have a material effect. We are in the middle of guidance range even with this. And our market share as I mentioned in the presentation is in the 40% to 41.5% range. So that’s a fulsome explanation what happened but remember that the impact is modest.

And then Nick on your…

Is it possible for me to come back on it, sorry. Why wouldn’t students having been unable to buy the new books just taken one of the many other options which have been affecting the [indiscernible] [0:23:13.9] rental or secondhand?

I think that the margins maybe they did. But the key point here is that you can see from our numbers that the impact was modest. By the time we got to the end of September, the vast majority of the backlog has been cleared and then where actually the students have the books that they needed.

Or I think it's also fair to say, Coram, I wouldn't say modest, but the biggest weighting in terms of the older we shipped from September to October was actually in the digital side because, Nick to be clear, just to make you absolutely clear. Normally, we give students 14 days access before they have to pay. What we did on the blanket basis across the whole of the business was extending that to 28 days. So, essentially that meant that you know frankly, if you started a course between the beginning of September and September the 14th normally, we have got those revenues within Q3 because we gave them 28 days. They shifted that into the first two weeks of August and October rather. And as Coram says, we’re already seeing that in our October numbers and that really make change. So that means why, we’re pretty confident, one, the impact was modest. And second, we are going to capture most of the benefits. And then on your third point, Nick, developmental, we deliberately started with the developmental math because as you rightly said, it’s one of the most challenging areas for faculty to teach. And therefore, if we could launch a successful product to that segment of the market on the global learning platform, that would be very confident that we have the underlying capabilities that we could then scale all the products on the back of that all quickly, which is what we’re doing. So I think you’re right to say that we’re not likely to see much material benefit from the developmental math product in financial service until 2020. And to be clear, we’ve always been clear that was the case. What it does mean, it gives us confidence now as we move rapidly to launch Revel at scale on the global learning platform for back-to-school next year for ’19. And as I think you know Revel is our first mobile, first product is going incredibly well, great growth, really great take up. So, you are -- you’re right on the developmental math point, but we’ve always been clear that was the case. And what does this give is more confidence that we can ramp up Revel and other areas through the second half of ’19 and into ’20 and beyond. Okay. All right, thanks Nick. Where should we go next?

Okay. We are now going to Ian Whittaker at Liberum. Please go ahead, Ian. Your line is now open.

Just three questions, please. First of all, just in terms of all of these one-off tax benefits. Can you just exactly explain what reassessment of historic tax positions means and what course that? The second thing is just want to actually sort of essence on the cash flows. If you look at your net cash inflow, the Q3 this year looks of half from what it was last year in Q3. Look, so it’s going down from around 320 million to 155 million. If you look at the net debt figures, it doesn’t look as though there was anything either extraordinary last year or indeed this year in terms of Q3 specifically. So could you just explain what exactly is happened there? The third point is just looking in terms of U.S. Higher Education. So you were down three in Q3, you grew modestly in the first time that would imply that -- sorry, you were down three for the first nine months, you were flat in the first half, and finally Q2 was probably down around 10. So, it looks as though at the moment that you’re probably trending towards the bottom end of your zero minus five sort of range for higher education revenues. Is there anything apart from what you’ve mentioned in terms of software sort of issue that we should expect any sort of changes the trends that are coming through?

Okay, Ian. Coram, do you want to pick up on those things?

Sure. On the tax rate, reassessment of historical tax provisions is effectively us looking at provisions that we have taken, and looking at events that have subsequently occurred and determining that they are no longer needed. And I’m very specifically that means the snap shoot for certain taxable audits in certain countries has passed. This happened last year. This happen this year and it’s a positive thing because it means the provisions that we originally don't have to fit and no longer to be able to be needed. It is a non-cash impact but obviously it does have a technical impact on the P&L rate. Remember, the other point I have made, which is medium-term guidance of tax remains unchanged at 20% to 22%. These are things that happen, but you can’t predict them on a go forward basis. On cash flow, you will remember from the half year that we talked about this that there are a couple of effects in this year's numbers, which mean the cash is slightly low than it was last year. In particular, we paid higher incentives in the first quarter of 2018 than we did in 2017, reflecting the strong performance in '17. And also in 2017, we had significant one-off dividends from Penguin Random House, as we tied up the balance sheet before the transaction was complete. So, cash flow is doing exactly what I'd expect it to, I mean, as we’ve said all alone this year. We are on track for 90% to 95% cash conversation, which is what you would expect for business at this kind. On the phasing, I think a couple of points are really important here. Firstly, you can’t look at this business on a quarter by quarter basis. We said all along, you have to look at the trends. You get returns benefit earlier in the year and the sales pressures flow through in the second half of the year. But if you pick on individual quarters, you would end up misinterpreting the trends. So, it's really important that go [look] on a quarter by quarter basis. Secondly we have said all year that there would be the phasing effect that we have seen. So the returns benefit flows through in the first half, the sales pressure flows through in the second. But on an overall basis, we are in the middle of our guidance range that we’re in our market share range and we're pleased with the performance that we’re delivering in that business.

And just to sort of answer that, if you look to everything we've been talking about over the last couple of years. We are deliberately trying to shift to a much more digital subscription led business model. And we’re very deliberately trying to reduce our dependence on third-party distributors and go much more direct both to individual students us consumers and direct institutions. The cumulative effects of those things is to reduce the level of gross sales but also very significantly reduce the level off returns, and that’s a good thing but it creates a healthy and more sustainable business over long-term. And I think Coram also true to say, if you look that’s why we would always say, looked on this on a sort of rolling 12 month basis. And if you look at that on a rolling 12 basis, we’re down about sort of 3%, which is why we were sort of at the end of May and June, which is the natural winds to the seasonal cycle in previous year and is pretty much in line what the overall market as well. I think that’s the way we should think about it. Okay, all right. Thank you, Ian. And Hugh, where should we go next?

We’re now over to Matt Walker at Credit Suisse. Please go ahead.

Just two, if I could get a couple of questions in. On the rental side, I think you have commented that you have said it was going to triple the size of the rental program. I think that you in the past said it was going from 130 this year even add another 150. So could you just explain how many titles you are actually going to have on the rental program in 2019? And also I think in the first half you commented the rental was up about 24%. Are you still tracking in line with that? Second question is on digital sales, you said mid single digit up including expansion. So could you just explain what it would be without the extensions? And then finally on OPM, you have given the enrollment number. Could you tell us how OPM is doing in revenue terms, excluding learning studio?

Okay, Coram, is going to pick up on those things.

So, on rental, we are currently just under 150 titles, as you said. And I think the point that John was making, over the next 12 months, you'd expect us to triple that. So around the sort of 400 mark, is where we get to and that’s part of our ongoing commitment to rolling out this program, which I mean to your question about sales is doing what we expected to. So we are seeing good growth in rental at the nine month mark. But also and this is a key point because this is one of the reasons why we are doing it, we are getting good visibility into that part of the channel and it helps us to protect against some of the challenges that we have seen in rental over the last couple of years. On the digital sales basis, I think because of the impact of the system challenges don’t think it's right to look at it without the conversion of things at temporary access, because as John just said, we extended people from 40 to 28 days. And post-September close, we have seen good conversion of those into paid subscriptions. So, the underlying position on digital sales is that is up mid single digits and I think that’s the way to think about it. In terms of OPM and enrollments, we are feeling positive about the way in which that business is going. And as John said, we saw some challenges a year or so ago because we are one of the first go through conversions of the programs, but I think you're starting to see the effect of additional enrollment growth and that’s bringing other partner programs on. And the learning studio is becoming smaller drag on the number. It's now a single digit millions worth of revenue and it will be flush fully through the system by the middle of next year.

Yes, and I think just then broadening out on your digital sales from Higher Ed to Pearson as a whole, you remember that in February the full year results for the first time, we broke out all revenues on the basis of pure digital, digital enabled and non-digital, will give you, obviously we will report that on a full year basis. In February, we're sufficed to say that’s the sort of key metric of the management and the board are tracking on a monthly basis, and we are pleased with the progress that we are making this year.

We are now over to Katherine Tait at Goldman Sachs. Please go ahead, Katherine. Your line is now open. Katherine Tait at Goldman Sachs, please go ahead. Your line is now open.

Two questions for me please. Firstly on the mid-single-digit growth in digital, I think before you broken this down between the number of registrations versus pricing, so I think last year to full year and sort of that flat registrations and high-single-digit pricing. Is it possible to give an update on those numbers for as a nine month stage? And then secondly on OPM, we’ve seen a few short seller reports out on one of your competitors in the OPM space talking about new competitive challenges from Coursera and Noodle and pressures on take rate. And clearly, your registrations continue to be very strong. And can talk a bit about how you feel your OPM offering is positioned versus particularly these are new lower price players? And any sort of commentary on pressure and no pressure that you’re seeing on take rates?

Thanks Katherine, I’ll take off both of those. On the first one, I mean, I think if you remember what we’ve been saying is for '17 and '18, we’re expecting digital registrations to be down slightly 1% or so on year-on-year. And that’s because whilst we’re getting good growth in Revel as we launched in product. We’re under some pressure in our mind math lab registrations because we have a very heavy waiting to the developmental math market, which is going through very significant sort of restructuring in states across the country. Which means just the number of students that have taken developmental math courses is coming down. We expect, so we should expect registrations to be down slightly again this year and then also stabilizing grow in '19 and '20 as we bring new products to bear and the sort of impact of the changing developmental math start to sort of dissipates. So on that basis, I think you can assume there for that without mid-single-digit growth in digital sales of the clear, which was talking here about 30% Pearson the higher ed courseware business. We are seeing registrations down slightly revenue mid-single-digits, because we’re adding a lot more value, sort of more early alerts, more personalization, more support to the students which means that we can charge more because we’re adding more value and they see them is helping them to achieve more in that courses. On the online program management, I said, this is a slightly similar story here to in connections. As you remember we acquired this business back in 2012. We had a management team that did a good job of taking it through the first phase of growth. We then have life a little more difficult through a year or two because we saw…

We’re now going to Giasone Salati at Macquarie. Please go ahead, Giasone. Your line is now open.

Coram, I guess the only buyer on the stock I have to congratulate you on a good set of results despite that delivery and delays. Two questions please. First, on one of the answers by Coram, I think you said overall Pearson is still talking for the middle of the guidance range. Did I get there right" And secondly, can I ask you a bit more color on the rental only impact on 19, improve increasing the number of books from 150 to 400 is very long-term, but can you tell us more about the phasing of that in 2019?

Coram is going to pick up on those first.

So just to clarify, when I talked about being in middle of the guidance range, I meant on higher education. So especially on the no to minus 5 range that we’ve given. Obviously, we are still firmly on track to deliver our operating profit guidance 520 to 560, but we’re not marrying that range at this stage because the area is not complete. And in terms of the, sorry, what's the second.

Second one is around the rental only impact in '19.

So in terms of the impact of rental, you’re right, it does have a mildly negative impact in the first year that we move these titles in. That’s because you moved from monetizing the sale upfront to spreading it over a series of semesters on the rental in terms of the rental receipts that we get. And in this case moving from 150 to 400 titles it will have a small negative track next year, but it's nothing that we can’t manage. Within the ranges that we given and its consistent with the strategy that we’re using to manage that business.

Okay. Thank you. Huge, where are we going next?

Okay. We now go to the line of Sarah Simon at Berenberg Bank. Please go ahead, Sarah. Your line is now open.

I have got three questions please. First one was just on revenue phasing, appreciate, as you say we shouldn’t have quarter by quarter, but you previously said that about 25% of your revenue have been higher right it done in H1. Does that still hold and can you give us an idea of how much of net revenues you booked or you would have expect to have booked by the nine months stage? Second one was on South Africa, have you rightly comment on this antitrust price fixing investigation and what kind of cost impact that could have or whether it has any impact on your ability to pitch for contracts going forward? And then the final was on the operational issues you had, were there any, I mean besides obviously, those sort of having to get it fixed, were there any extra costs that you incurred? We had reports that you were paying for shipping and that you have suspended returns fee so any color on that would be helpful?

Coram, do you want to pick on those things?

Sure, on the revenue phasing Sarah. I think we have been very clear about the patterns that we expect to see here. So you get the benefit of the returns in the first half, you get the pressure on the sales line in the second half. So, it is behaving exactly the way we expect in terms of math shape. And I do think it's important that you look through the quarter-by-quarter. I understand you have taken that point on board. In terms of how much…

Sorry, Coram. Can you give us though a bigger -- it's very hard as a sell-side analyst to have a proper view on this business that you have no idea what proportion of the revenues you're recording in the first half versus the second half or indeed in the quarters? I appreciate, we should be thinking full year, but you know, this is a significant business view and you have given us very little information to go on?

I think to be fair Sarah we have given you lots of information in terms of the shape of the top line and the way in which we think about guidance. And in fact, we gave you sales number every quarter. So you can really understand what is going. To answer your question its roughly 75% to 80% of the revenues have been generated by the end of the nine months period. But there is still a chunk to go and the trends that we have seen all the way through the year have been very consistent. So I do think that gives you what you need.

And on Q4 Coram, I think it's fair to say, we'll see some benefits of the timing of sales shipping from September into October, but that's also offset by the sort of a secular trend we are seeing, which is sales without the December into January as we move from a print to a digital model. Those are the two things Sarah that you should be thinking about in Q4.

Yes, absolutely. And to pick up on this point about extra costs, in a few instances that we would have expedited shipping in some cases we did do free shipping, and in very few cases we might have compensated retailers. And to be really clear it is an immaterial amount in the context of Pearson, so it’s a very small impact and it will not impact to our ability to flavor our operating profit guidance. So we use those tools judiciously, but they haven't had a major impact in terms of cost. And then on the antitrust case in South Africa I think just to be crystal clear about this it is an antitrust case against published as association in South Africa of which we are a member. But it is against publishers association and I think you will understand given that investigation is ongoing that I can't comment any further on that.

We will now go to the line of Tom Singlehurst at Citi. So, Tom, please go ahead. Your line is now open.

I think you just said that the U.S. Higher Ed was zero to down mid single digit, you are guiding to minus 3. I mean that’s relevant for the full year I should say and it's relevant to I think matching on minus side that is one of the double check there. Are you…

I think what we are saying, Tom, is our guidance for the full year is will be somewhere between flat and minus 5, and at the end of nine months we're minus 3. And that is what we’re saying.

Second question, I mean obviously, you’re doing a good job on Inclusive Access. Is Inclusive Access like rental, i.e. when a colleague moves an Inclusive Access contract, is this also initially guided to growth? That was the second question. And then the third question was going to be on drop through, because I think one of the bad points is it still very well seeing growth in the non-higher ed pieces of the business, but the drop through is not as good. But can you give us any sort of color on the relative drop through the different parts of business. And especially, if we see growth sustaining in the next year and that will be a step change in drop through for non-higher ed pieces?

Coram, do you pick up on those two points?

Sure. On Inclusive Access, it isn’t dilutive to growth in the same way that rental is. Just think about mechanics. Rental involves you moving away from not from an upfront monetization of selling a product to sort of subscription-based rental. Where is on IA, you typically are doing subscription deals on digital product, which you wouldn’t realize anyway. And so there isn’t such a big change in the timing of the revenues. In terms of the sort of rest of the business, I mean couple of points here. Remember we’ve shown the contribution split of the business and higher ed is not significantly out of line with the rest of the business. So we know that in the past, it has been a higher margin business, but these days, it is more in line with the rest of Pearson, which is testimony to the work that we’ve done and improving the contribution and margin on the rest of the business. So there isn’t a huge impact as you, because of the way that the top line is changing. The other thing, I’d add on Inclusive Access, which is not directly relevant your question, I think, is an important point to make is, this is still a relatively new initiative for us. And we learn as we go and as we go, we can improve their shape to retreat the offering. And I think what we’re finding is, in the early years, you can agree the Inclusive Access deal at a headline level with the colleague’s leadership, but then it normally take you one to two to three years to really see that translate into very significant self-through, because you have to persuade individual faculties which is headline deal. And that’s a sort of slight long winded of saying, we’re really pleased with the progress we’re seeing in the number of deals for singing, but there’s a lot more benefit to come from this. Because it’s really we can improve conversion and sell-through rates from those headline deals over the next couple of years. And that’s the key to really making the most of this.

That makes sense. And just coming back to the drop through, I mean growth in area like OPM and virtual schools as higher ed where typically there’s still an upfront, a lot of upfront investment. I mean is that, as I say, is going into next year, even this year? Is there any, because growth is coming from existing programs is that, does that mean it’s inherently more profitable? Is there anything like that?

I think OPM is a specific case where over the life of the contract, they are profitable, but also in the first couple of years. There is some margin investment that you have to make, particularly around marketing and other sort of ramp up costs. So there is a trade, if you drive that business harder than in the initial data put some pressure on profitability. But actually, if you look at other parts of our structural growth opportunity connections is a strong margin business. Pearson Test of English drops through very nicely. And our Professional Certification business, VUE, is also good margin business. So, I agree with your point on APM and that's a very particular characteristic about business, but I don’t think you should, I think you can hear in the way I’m answering this, so actually the margin mix of the structural growth is also good.

Okay, we have time for one final question. So, the ultimate question for today is of the line of Chris Collett at Deutsche Bank. Please go ahead, Chris. Your line is now open.

Just had a couple of questions left. One was, did you -- did I hear correctly earlier that you talked about within the college business of the gross sales had been lower than your expectations but then offset by better returns. I was just wondering, if you could give us a little bit more color about that. And if that is the dynamics that you expect to continue for so for this year and into subsequent years? And then you made a comment about holding your market share within historical ranges. Just wondering if you had seen anything across the broaden market about any market share shift. And then a separate question was just on the professional certification business in the U.S, you’re benefiting from the medical college admissions test but coming in this year, but just wondering, that excluding that benefit shouldn’t this business be doing really well given the economy low and unemployment and IT certification.

So on your third point, yes and it is and it just been year on year our most reliably successful business over the last decade and that’s why we continue to invested in support growth and develop it. On the market share point just to be just replay Chris, there sort of monthly MPI data, we see how we did and we see how the rest of the industry excluding those days, so we’re all in a position to share with you to give you any color not but we would anyway because that’s for all the companies to do not for us. And then Coram, do you want to pick up on the gross sales and returns point.

Yes, so you did say correctly, I mentioned in the presentation that gross sales were slightly lower than we would expect it, but returns were after them we expect it. Actually, this is a trend we have seen pretty consistently and saw last year as well. I think the ultimately, we work towards managing the channel and making sure that we are fulfilling the demand, but not over engineering that and that’s why net sales is best measure. We’re in the middle of the range of the nine month mark which tells you that we managing this effectively. Great sales and returns of two sides of the same coin and all of the actions that we’re taking are managing the channel in the right way.

And Chris, the reasons I explained earlier, if we are getting, if we are achieving our expectations for this market and we’re getting there with gross sales, lower and returns also, that’s a good thing. That means our strategy is working because none of us want to be back to the world we were a few years ago where we were saying high growth sales and then high return. So to actually squeeze inventory out of the channel says that we are succeeding and moving to more subscription models, moving more digital, moving more direct to consumer and institution. So as long as we are achieving that within the range which we are, this is a positive and healthy thing both for our business and for the industry.

Final call, we have got time for today. John, can I please pass it back to you for any closing comments.

Just to thank everybody for your continuing interest in the Company. Joe, Tom and Angeli have been with us on the call today. If you have any further questions to follow up on, please do so. If not, I look forward to catching up in the new year and in the meantime, obviously as you can tell we are very pleased with the progress that we're making and confident that there is a lot still to do. We are confident that the recovery and return to growth is very, very much on track. Thanks for your time.

This now concludes this course of sessions. So thank you all very much for attending. And you can now disconnect.